It took long enough. After years of post-financial crisis struggle, the national real estate picture for the United States has brightened. The housing market (single-family homes, townhouses and condominiums), the multifamily real estate market (apartment buildings and garden-style apartment communities) and the lending industry all appear to have turned the page.
The recovery is here: during the first half of 2013, home prices saw their largest increase since their high seven years ago, at the peak of the housing bubble. Home values rose by about 6% year-on-year in June. With the summer home buying season, bidding wars have erupted on desirable properties, especially in the West and the Sunbelt, the regions that are leading the housing rebound. In light of the slow economic growth of the period, the speed of the recovery has taken many by surprise.
The extended period of record-low interest rates fueled by the Federal Reserve's monetary policy is a leading driver of the value gains in the housing market. While credit standards from banks remain somewhat tight compared to their historical standards, buyers who qualify for mortgages have rushed to the market in order to lock in basement-level debt payments available on borrowed funds.
The other leading driver of the housing rebound is the lack of inventory, which bodes well for homebuilders like Toll Brothers (TOL) or KB Homes (KBH). The existing supply of homes only amounts to 5 months' worth of sales in the second quarter of 2013. While construction virtually stopped in 2008 and after, the U.S. population has kept growing, while homebuyers repaired their personal balance sheets in order to purchase again. In addition, after over 4.5 million foreclosure cases, banks have sold the majority of the distressed properties they owned, even though they are still facing legal liabilities, like Wells Fargo (WFC) and JPMorgan (JPM). Cash-paying investors came in aggressively and crowded out the marketplace. Most noticeably, single-family homes became an institutional asset class for the first time, with large investors such as Blackstone (BX) and Colony Capital purchasing thousands of residences at once. The stock market is currently witnessing the first IPOs of such companies.
On the commercial level, apartment buildings and garden-style apartment communities have risen in price even more than homes. In major markets, investors compete intensely with each other for low single-digit yields. Here again, low interest rates have fueled values.
Moreover, the global economy is channeling capital into North America. While European growth is sluggish at best, and the emerging markets of China, Brazil and India cause capital to leave, the United States seems a very attractive place where to park funds for those seeking to invest in real estate.
2012 evidenced the sharp rise of residential rents due to the lack of construction and the creation of a population of renters made up of individuals who lost their homes during the subprime crisis. In New York City, the average rent has surpassed $3,000 per month for the first time, and the vacancy rate is below 2%. The San Francisco market is under similar pressure. Rents are still rising in 2013 across the country, albeit at a slower pace than earlier. The multifamily sector leads the recovery among all commercial real estate asset classes: office, retail or industrial buildings. Specifically, the demand from growing technology start-up companies has upwardly influenced office building prices (especially in downtown areas of cities with highly educated workforces such as New York, San Francisco, Seattle and Boston for instance). Office REITs, such as recently IPO'ed Empire State Realty Trust (ESRT), should benefit from such a trend as long as their assets are well-located.
Even though there are still 5 million houses with negative equity in the United States, banks are experiencing their lowest mortgage delinquency rate since the financial crisis. Lenders are now subject to more regulation and capital level requirements than before, but lending standards are slowly being relaxed. The government is making a push to that end, and wishes to redirect much of the loan issuance activity of quasi-public Freddie Mac (FMCC.OB) and Fannie Mae (FNMA.OB) to the private sector.
While one can certainly question the speed of the housing rebound, fears of a new bubble are considerably unfounded. Chances of a real estate crash of the magnitude of the recent one are very low. Indeed, the price increases will slow when interest rates rise, yet the economy is growing, though slowly. While the supply of homes and apartments is on its way, the strong demographics of the U.S. will prevent prices from dropping. In addition, first-time homebuyers will step into the marketplace as they have been and continue to be sidelined by aggressive bidding from deeper pockets. Threats to the recovery do exist, such as a negative reaction to the Federal Reserve's exit of quantitative easing and worries from investors to instability in Syria, to name a few, nonetheless escalating prices might endure a few years longer. Overall, 5 years after the demise of Wall Street, housing has completely turned the corner.